"The anchor of global asset pricing dances! Soaring oil prices shatter hopes of interest rate cuts. 'Big buyer' Japan sees largest US Treasury sell-off in nearly four years."

The surge in oil prices has led to a historic reversal in the market's bets on Fed policy, with Japanese investors withdrawing from the US Treasury market at the fastest pace in nearly four years. The latest international balance of payments data released by the Japanese Ministry of Finance on Wednesday showed that in the three months ending March 31, Japanese investors sold a net total of 4.67 trillion yen (approximately $29.6 billion) of US Treasury, agency, and local government bonds, marking the highest quarterly selloff since the second quarter of 2022. In the month of March alone, Japan sold a net total of 2.2 trillion yen (approximately $14 billion) of US sovereign bonds, marking the second consecutive month of selloff, following a net sale of 2.77 trillion yen in February. At the same time, foreign official institutions' holdings of US Treasury securities in the Federal Reserve custody accounts decreased by $8.7 billion in a week, leading the market to believe that this was related to Japan selling US bonds to obtain intervention funds. According to data released by the US Treasury Department earlier, Japanese investors had already sold $4.14 billion worth of US agency bonds in the first two months of this year, indicating that their withdrawal from US fixed income assets had already begun. The surge in oil prices has led to an increase in inflation expectations and a subsequent reversal in Fed policy expectations in Japan. Since the outbreak of the Iran war, disruptions in the global energy supply have occurred. On May 11, due to the failure of peace talks between the US and Iran, international oil prices surged again, with WTI crude oil breaking through the $100 mark intraday and Brent crude rising to $105 a barrel. This further escalated on May 12, with oil prices rising rapidly again: WTI crude oil rose 2.6% to $100.65 per barrel, while Brent crude rose 2.2% to $106.53 per barrel, leading to further tension in the energy market. Currently, Brent crude oil has risen above $107. The geopolitical situation has had a profound impact on the supply side. Since the US and its allies launched attacks on Iran, shipping in the Strait of Hormuz has been severely restricted. This crucial waterway, which handles about 20% of global oil transport, is still partially blocked, preventing a large amount of Middle Eastern production from entering the international market smoothly. Natasha Kaneva, global commodity strategy director at J.P. Morgan, analyzed that global oil supply disruptions now amount to 13.7 million barrels per day, about 14% of global demand. As a result, global inventories are being depleted at a rate of 7.1 million barrels per day, but there is still a supply gap of about 2 million barrels per day in the market. What is even more unsettling is J.P. Morgan's extreme scenario warning: if the US-Iran conflict worsens, Brent crude prices could rise to $150 per barrel. Even in J.P. Morgan's base scenario, Brent crude oil is expected to fluctuate between $120 and $130 per barrel in the near term. If the Strait of Hormuz remains closed until mid-May, breaking through $150 is not a small probability event. Fitch Ratings also anticipates that Brent crude oil will remain in the range of $100 to $110 per barrel during the closure of the strait from May to July, and will only fall back to around $70 per barrel until September, determined by supply and demand. In this context, the impact of oil price shocks has fully transmitted to domestic price levels in the United States. Data released by the US Bureau of Labor Statistics on May 12 showed that the Consumer Price Index (CPI) rose 3.8% year-on-year in April, the fastest increase since May 2023, surpassing both the previous value of 3.3% and the market expectation of 3.7%. On a month-on-month basis, it rose by 0.6%, in line with the median forecast of Reuters surveyed economists. In terms of structure, the 3.8% increase in energy prices contributed to over 40% of the CPI increase in the month, with gasoline prices rising by 5.4% and home heating oil rising by 5.8%. Excluding food and energy, the core CPI rose by 2.8% year-on-year and 0.4% month-on-month, also exceeding market expectations. What is alarming is that inflation pressures are not limited to energy prices. Food prices, which had remained stable in March, accelerated by 0.5%, with grocery prices rising by 0.7%, beef prices surging by 2.7%, and fruits and vegetables increasing by 1.8%. The transmission effects of services, housing, airfare, and tariffs are also continuing to manifest, with housing prices rising by 0.6% that month, airfare increasing by 2.8%, and accommodation costs rising by 2.4%. Chicago Federal Reserve President Goolsbee stated that the April inflation data was "disappointing," with the most worrying aspect being the pressure on service prices, as this type of inflation is unlikely to be directly caused by oil prices or tariffs, but more reflects a systemic spread of price pressures. Market forecasts are warning that the peak of inflation is far from over At the time of the CPI data release, traders on the forecasting market platform Kalshi issued a more aggressive warning: the peak of inflation is far from over. They believe that price increases in 2026 will almost certainly exceed 4%, with a probability of over 55% of exceeding 4.5%. They also believe that there is a close to 40% probability of inflation exceeding 5% this year a situation that has not occurred since February 2023. This is significantly higher than Wall Street's expectations. Economists surveyed by FactSet expect inflation to peak at an average of 3.8% this quarter and then fall to 2.8% by the end of the year. J.P. Morgan's base forecast shows that US CPI may hit 4% in May and not fall below 2% until April 2027; in the worst-case scenario, if summer oil prices remain above $120, CPI could exceed 5%. Morgan Stanley's chief global economist Seth Carpenter also warned: "In the first quarter of supply disruption, the impact on oil supply mainly manifested in price increases. If the supply disruption continues into the second quarter and prices continue to rise, then the 'temporary' nature of the impact will begin to weaken... The major central banks will have to shift policy from procrastination to adjusting their stance." Even if the current fragile ceasefire agreement in the Middle East is maintained and the Strait of Hormuz is subsequently reopened, economists warn that costs will remain high for several months. The rise in fertilizer prices will further push up grocery expenditures, while high oil prices will also seep into a wider range of goods and services prices through transportation costs. Skele Vand, CIO of Reagan Capital, pointed out, "The primary impact of the Middle East conflict is on oil prices, which have quickly spread to prices paid by consumers at gas stations. But the next frontier to watch out for is the rise in food and raw material input prices." Policy expectations make a significant turn, causing a dramatic swing in the "global asset pricing anchor" The dramatic changes in oil prices and the inflation environment have led to a historic reversal in the market's pricing of the Fed policy path. Just before the outbreak of the Iran war in February, overnight index swap markets showed that traders generally expected the Fed to cut rates by about 50 basis points for the full year of 2026. But the energy shock caused by the war has completely changed the interest rate outlook. Currently, interest rate swap contracts linked to Fed rate decisions show that the probability of a rate hike by the Fed before April next year has exceeded 50%, while expectations for rate cuts have been further delayed. CME FedWatch data shows that the probability of a rate hike of at least 25 basis points in December has risen to about 34%, up from just 26.3% a day earlier. Pricing has largely ruled out the possibility of a rate cut by the end of 2027. Naokazu Koshimizu, a senior interest rate strategist at Nomura Securities, commented on this, saying, "There is a strong trend of significant position adjustments in the market. The outlook has become highly uncertain, not only in terms of how much the rate cut might be delayed, but also whether the next step will be a rate hike. The market has always believed that a rate cut would happen at some point, and this has supported buying behavior." This dramatic reversal in expectations is also reflected in the dissent within the Fed. The Federal Open Market Committee (FOMC) meeting last month saw the highest level of dissent since 1992 with as many as three officials voting against releasing a policy statement with a dovish bias. Even the most dovish Fed board member, Milan, has significantly softened his stance, sharply reducing his rate cut expectations. The upcoming official appointment of the new Fed Chair Warren has also sparked widespread market attention, with expectations that his appointment will face extremely difficult policy choices. Based on this, J.P. Morgan has issued a stern assessment of the global oil market, warning that supply disruptions caused by the US-Iran conflict could push Brent crude oil prices to $150 and raise US inflation to 4%, while also causing the Fed to hold off on making any moves until 2027. Goldman Sachs and Bank of America have also joined the camp of Wall Street's major banks predicting a delay in rate cuts. They believe that employment and inflation data support the Fed's rationale for keeping rates unchanged at least until the end of this year. US Treasury yields are rising In this cross-asset turmoil, the most core variable is the sharp rise in US Treasury yields. As the "global asset pricing anchor," the 10-year US Treasury yield profoundly affects the global borrowing costs of everything from mortgages, corporate loans to sovereign debt for every basis point change in US Treasury yields, global assets need to be re-priced accordingly. And at this moment, this "anchor" is swinging wildly. Looking at market dynamics, yields across the US Treasury curve are soaring. The 30-year US Treasury yield has once again crossed 5%, becoming the first long-term bond to breach the psychological barrier of 5%. The 5-year yield has further stabilized above 4%, the 2-year yield has climbed to 4%, and the 10-year yield has broken through 4.5%. What is even more concerning is that driven by expectations of a surge in energy costs due to the Iran conflict, the 10-year yield this week at one point approached 5%, a level not seen since 2007. The magnitude of this increase can be seen in stark contrast to its starting point. Just before the US attacked Iran at the end of February, the 10-year US Treasury yield was only 3.94%. In other words, in less than three months, the world's most important interest rate benchmark has climbed more than 52 basis points. Such a significant upward movement has triggered a comprehensive reassessment of global risk assets: the rise in US Treasury yields directly raises the risk-free rate, suppressing overvalued assets such as stocks, and major stock indices worldwide are generally under pressure, with sectors like technology experiencing significant declines. At the same time, the 30-year UK government bond yield hit 5.81%, the highest level since 1998, with European bond markets also experiencing concurrent sell-offs. Looking at the yield curve structure, the rise in long-term yields is significantly faster than short-term yields, with the 30-year and 5-year yield spread maintained at around 90 basis points, presenting a typical "steep bearish" pattern. This means that the market is simultaneously pricing two dimensions: the short end reflects a reevaluation of interest rate hike expectations for policy rates, while the long end reflects persistently high inflation, expanding debt supply, and the return of credit risk premiums. "The market's pricing logic has undergone a fundamental reversal: from expectations of rate cuts narrowing to fears of rate hikes," analysts at Guosen stated in a report. The interest rate futures market has completely ruled out the possibility of rate cuts this year and has instead begun pricing in the probability of rate hikes by the Federal Reserve in 2026. The battle over the 10-year US Treasury yield hitting 5%: Wall Street's hawk-dove confrontation As the 10-year US Treasury yield approaches the "life-or-death line" of 4.5%, Wall Street is embroiled in a fierce debate. Steven Barrow, head of global G10 strategy at Standard Bank, predicts that the 10-year US Treasury yield will hit 5% this year, a forecast that is more than 80 basis points higher than the average year-end forecast by Bloomberg strategists. Barrow said, "This viewpoint is not driven by war but has been intensified by it. The Fed may maintain overly accommodative policies, and structural inflation pressures are rising. He listed a series of supply-side factors, including global supply chain bottlenecks, the ongoing impact of climate change, and tightened immigration policies limiting labor supply. However, for the 10-year yield to truly break through 5%, larger-scale sell-offs are still needed. For traders, this is a threshold of significant psychological importance. Barrow himself admits, "The market can currently hold the 4.5% yield, and we have not really sustained it at 5%, but that does not mean it won't happen in the future." In terms of bearish momentum, a customer survey conducted by J.P. Morgan as of May 11 showed that investors' short positions had reached the highest level in 13 weeks, signaling a systematic accumulation of bearish sentiment. In the SOFR options market, traders are actively seeking hedge risks for further pricing of rate hike expectations in the coming weeks. Kelsey Berro, fixed income portfolio manager at J.P. Morgan Asset Management, pointed out, "The market has effectively repriced the reality that 'energy price increases will keep inflation high for a longer period'." As the "global asset pricing anchor," the US Treasury yield, with every uptick and downtick, affects the repricing of trillions of dollars in global assets; today, this anchor is swinging more violently than ever before. The historic selloff by Japanese investors not only serves as a sign of the macro upheaval in this round but also plays a crucial role in the chain reaction. With the 10-year US Treasury yield approaching the key level of 4.5%, the 30-year has already crossed 5%, the 2-year is back near 4%, and the market has clearly entered a new paradigm of "high rates, high inflation, high volatility," or the "three highs."